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Princely gift for a battered bourse

Billionaire joins Saudis in proposed bailout

The Saudi stock market breathed a sigh of relief yesterday as a multibillionaire prince vowed to pump equity into the battered bourse.

But the temporary reprise in a market that has lost 30 per cent of its capitalization in the past two weeks may do little to stop the long-term slide, or fortify the shaky underpinnings of the Gulf region's red-hot stock exchanges.

The Saudi bourse soared higher yesterday after falling more than 4 per cent at the open. It closed the day up nearly 5 per cent after Prince al-Waleed bin Talal, the world's eighth-richest man, promised to invest almost $3-billion (U.S.) in the market, and the Saudi government said it may allow expatriate residents to invest in the stocks listed there.

That the intervention was necessary is another sign the region's profitable experiment with free markets may fail.

Eight of the 10 best-performing major markets in the world last year are based in Arab countries.

Led by the twin Cairo and Alexandria Stock Exchanges in Egypt, which rose more than 160 per cent in 2005. The region has been in the eye of a perfect economic storm for the past few years, in part because of soaring oil and natural gas prices. But retail investors, who make up the bulk of trading, seem to be coming out of a period during which they bid up some regional stock prices to unsustainable valuations.

A drop in the Saudi market over the past three weeks was echoed in most of the region's markets, where retail investor panic caused massive losses across the board. Saudi regulators place a 5-per-cent limit on daily price movement. The market has hit or come close to the floor-end of that limit recently.

Because wealthy investors in Gulf states became less inclined to invest overseas after the attacks of Sept. 11, 2001, more money that would otherwise be sitting in London or New York now resides in Middle East bourses. These markets have become more attractive in recent years as governments in the region work to cut red tape and improve transparency. For many countries, the stock exchange represents a relatively novel way to move wealth to a larger portion of the population, rather than confine it to a powerful and well-connected minority. As the rise of radical Islam became more attractive in countries such as Saudi Arabia and Egypt -- where the Muslim Brotherhood did much better than expected in the last round of elections -- the ruling parties have begun to view this movement of wealth as vital to keeping citizens happy, and maintaining the political status quo.

And for the most part, small investors have responded with overwhelming enthusiasm. Retail investors drive the bulk of trading in virtually every market in the region. In Qatar's stock market building last month, local investors flooded into brokerages trying to get in on an impending IPO. Investors brought friends, relatives and wives with them, forcing the brokerages to stay open well into the night.

On a much larger scale, investors of Prince al-Waleed's means have also taken an interest in local markets. Prince al-Waleed, 49, listed his hotel holdings on the Dubai stock exchange last month. He bought Toronto-based Fairmont Hotels & Resorts Inc. this year for $3.9-billion. He also plans to list Kingdom Holdings on the Saudi exchange.

Like other bourses in the region, the Saudi stock market suffers from a lack of deep liquidity. Most markets do not allow foreign investors into the market as easily as local investors, with the Cairo stock exchange being a rare exception. However, this correction has at least given regulators reason to reconsider trading rules and allow for easier foreign investment in order to balance the trading mix. Even in Cairo's market, local investment drives two-thirds of daily trading.

In the past couple of weeks, stocks have been sinking in many Arab countries, driven almost entirely by local retail investor selling.

In many markets in the region, there are protections against this kind of fluctuation, usually in the form of trading price floors and ceilings.

But the region is also protected by an economic spinoff of the dominant political system. The ruling royal families in many Gulf states have taken a keen interest in developing their local markets.

As such, members of the royal families sit on the boards of almost every major public company in the area. The result is a sort of visible hand propping up the market in times of crisis, exemplified by Prince al-Waleed's promise yesterday.

"We know there is a lot of wealth in this region," Sameh EL Torgoman, the former head of the CASE and now a board member on the Dubai International Stock Exchange, said in an interview last month. "The question is, how do you use this wealth?"

The run-up

Mideast stock exchanges have led the world in market returns for the past three years, thanks to high oil prices and strong corporate profits. Investors have come to expect staggering returns from the exchanges, many of which are only a few years old.

The hiccup

The party stopped in January, as investors panicked and markets across the Middle East plunged. This week has seen daily declines of double-digits on markets in Saudi Arabia and Dubai, which has posted a 41-per-cent drop this year.

The cure?

The Saudi government yesterday said it might pump cash and liquidity into the market by allowing foreigners in to invest and making stocks more affordable through splits. And Saudi Prince Alwaleed bin Talal says he will invest as much as $2.7-billion (U.S.).